The U.S. Securities and Exchange Commission and Citigroup Inc. tried Monday to convince a skeptical judge that a proposed $285 million civil settlement over alleged fraud involving toxic mortgage debt is fair to the bank's shareholders and serves the public interest.
U.S. District Judge Jed Rakoff had ordered both sides to answer nine questions about the Oct. 19 accord, ahead of a Wednesday hearing. The judge previously has threatened to reject similar SEC settlements that, like the Citigroup pact, do not require companies to admit or deny wrongdoing.
The SEC had accused Citigroup of selling a mortgage-linked investment at the same time it bet the debt would fail. The charges relate to the sale of a collateralized debt obligation known as Class V Funding III in 2007, as the housing market was beginning to collapse.
Citigroup's$285 million payment would include $160 million representing ill-gotten profit, $30 million of interest, and a $95 million fine.
One Citigroup employee, director Brian Stoker, was also charged by the SEC. He has contested the charges.
In court papers, the SEC said the settlement does not unfairly harm shareholders, who were not victims of the transaction but had been "indirect financial beneficiaries."
It also said that while it is "reasonable to estimate" that investor losses might top $700 million, such losses were not the proper measure of damages. As a result, the SEC said it "did not devote resources" to calculate the precise amount.
The SEC also defended the $95 million fine, less than one-fifth the one that Goldman Sachs Group Inc. paid in a 2010 SEC settlement, saying that Citigroup was charged only with negligence, while Goldman was more culpable.
Citigroup, meanwhile, said in a separate court filing that prolonging its case could make it harder to defend against other mortgage litigation, and that it exercised appropriate judgment "to determine how much of the shareholders' money should be used to settle."
The bank also appeared to pin blame on Stoker, saying the SEC did not show that any superiors knew enough about the transaction or alleged inadequate disclosures to be charged.
Lawyers for Stoker did not immediately respond to a request for comment.
'STEW OF CONFUSION AND HYPOCRISY'
The SEC and other regulators face pressure from lawmakers and the public to hold Wall Street executives accountable for their role in the 2008 crisis and subsequent recession.
Rakoff's nine questions addressed matters such as why the fine was not larger and why no individuals were held financially responsible.
The judge is known for having in 2009 rejected the SEC's proposed $33 million settlement with Bank of America Corp. over that bank's takeover of Merrill Lynch & Co. He later approved a $150 million accord.
In approving an accord with Vitesse Semiconductor Corp., Rakoff in March threatened to reject future SEC settlements that do not require corporate defendants to address whether they committed wrongdoing.
"The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the SEC," he wrote. "The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the SEC; but, by gosh, he had better be careful not to deny them either.
"One thing is left certain: the public will never know whether the SEC's charges are true," he added.
The case is SEC v Citigroup Global Markets Inc, U.S. District Court, Southern District of New York, No. 11-07387.
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